David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)

I beg to move amendment No. 133, in clause 54, page 27, leave out lines 14 to 16 and insert—

‘(a) a transaction or arrangement entered into on or after 12th March 2008, or

(b) an asset acquired on or after 12th March 2008,but does not relate to an asset acquired on or after that date pursuant to a pre-commencement contract (see subsection (5)).

(5) For the purposes of subsection (4) a contract is a “pre-commencement contract” if—

(a) the contract is a contract in writing made before 12th March 2008;

(b) no terms remain to be agreed on or after that date;

(c) under the terms of the contract the acquisition of the asset on or after that date had already become obligatory on that date; and

(d) the contract is not varied in a significant way on or after that date.’.

I share the desire to get through some of the clauses as quickly as possible, but I am grateful that we can turn to amendment No. 133. With your permission, Mr. Hood, I will take this opportunity also to make one or two remarks about clause 54 in general, as that would, from my perspective, avoid the need for a full stand part debate.

The objective of clause 54 is to ensure that credit for any foreign tax paid on trade or professional earnings is no more than the UK income tax due on the same earnings. That is not an unreasonable objective, but we query the element of retrospectivity. However, I do not want to overstate that, and we will debate retrospective legislation at greater length when we discuss clause 55, which deals with a much more serious issue. The element of retrospectivity as regards clause 54 relates to the fact that subsection (4) applies to the

“payment of foreign tax on or after 6 April 2008, or...income received on or after that date in respect of which foreign tax has been deducted at source.”

That is retrospective in nature. An individual might have invested in long-term, income-generating assets, such as overseas properties, on the basis of the existing tax position but then find that they fall within the new regime very quickly—after 6 April 2008—and therefore get a different tax treatment than that which they anticipated when they made the investment. Amendment No. 133 proposes that we should instead consider the date on which the relevant transaction was entered into. If it was made after 12 March 2008, it should fall under the regime set out in clause 54, but if not, the person should continue to benefit from the existing provisions.

The amendment was tabled, in a slightly probing manner, for two reasons. First, and most importantly, there is a danger of creating a parallel system with two different tax regimes, the application of which would depend upon when the transaction was entered into, and that would create unwelcome complexity. Secondly, the Government argue that the changes confirm the existing practice but set aside doubts that have been expressed about how foreign tax credit is calculated following recent case law. I will take the words in the explanatory notes at face value, but perhaps the Minister could elaborate on the existing  case law so that we can assess the level of those doubts, which can sometimes be more substantial than the Government are prepared to concede. I should like to test their position on that. We should tread carefully where there is an element of retrospectivity in legislation, and the onus is on the Government to justify the provisions that they have made.

The objective of the clause is to ensure that relief for foreign tax is given once and once only. There can be circumstances where the equivalent does not apply. For example, a UK investor in an overseas asset such as a US limited liability company might find that he was liable to tax overseas but would not benefit from any kind of relief. The Institute of Chartered Accountants has raised that point with the Treasury, giving the example of a UK business that has an interest in a US LLC. Under current law, no relief is available in the UK for tax paid in the US unless the LLC’s income is distributed, notwithstanding that the UK shareholder of the LLC will be subject to US tax on the LLC’s income as it arises—in other words, irrespective of whether it is distributed. Has the Minister considered that?

Jimmy Hood (Lanark & Hamilton East, Labour)

Order. Before I call the Minister to respond, I should point out that it would be convenient to have the stand part debate at the same time as the debate on the amendment.

Jane Kennedy (Financial Secretary, HM Treasury; Liverpool, Wavertree, Labour)

The ICA wrote to us with several detailed requests for changes, but I do not want to be drawn into those as they are outside the scope of the clause. However, I would be happy to write to the hon. Gentleman with details of the consideration that is being given to those proposals and circulate that correspondence to members of the Committee.

The clause does not affect the entitlement to credit for any foreign tax paid before 6 April 2008, so it does not have the retrospective effect that the hon. Gentleman fears. It re-establishes a rule for foreign tax credit that has always been the accepted method prior to recent case law. I shall explain that in more detail in a moment. This is the internationally accepted method for calculating credit relief, and there has never been any basis for believing that the UK Government should allow unrestricted foreign tax credit. In that context, there is no justification for a change that would add substantial complexity and uncertainty to the rule. That is what the amendment would do, although I appreciate that it was tabled in a slightly probing fashion.

The Government have done nothing to encourage people to plan on the assumption that high rates of foreign tax will be subsidised by the Exchequer. We have always made it clear that the purpose of foreign tax credit is to eliminate double taxation and not to go any further than that. The clause merely restores that long-established view of how the law on tax credits applies. The case that has been mentioned involved Legal and General; it was a corporation tax case heard in 2006. The corporation tax position was restored by legislation in 2005, and the clause makes a parallel change for income tax. There is no justification for delaying the implementation of the clause, as the amendment proposes. That would introduce considerable complexity and uncertainty whereby different rules would apply to different  foreign tax payments. The amendment would mean that for assets or contracts that fell outside the scope of the clause, foreign tax credit would be unrestricted, putting at risk tax due from wholly UK-based activities.

I will give some background to the clause, since we will have, as you have indicated, Mr. Hood, the main debate now. The effect of the clause is to restore the way of calculating foreign tax credit that was generally accepted before the recent case law. The rule that the clause re-establishes is endorsed by the OECD and overwhelmingly used by those countries that give foreign tax credit against foreign earnings. The clause amends how the maximum credit for foreign tax is calculated, when the foreign tax is paid on trade or professional income of an individual. The purpose of the clause is to ensure that the credit that we give for foreign tax is sufficient to eliminate double taxation, which is a risk. It does not go any further.

In particular, the clause prevents foreign tax credit being set against income tax due on UK earnings. For example, if a musician earns income from a performance abroad, he or she is likely to have to pay foreign tax on those earnings. The foreign tax can be set against the UK tax due in respect of the same earnings—those attributable to the foreign performance—but should not be set against income tax due on earnings from performances in the UK during the same tax year. The clause enables the year’s income to be subdivided, so that each activity that gives rise to foreign income is ring-fenced from other activity for the purpose of calculating credit due for foreign tax paid. The clause also ensures a result that is fair to the taxpayer, while placing a necessary constraint on credit for foreign tax to prevent it from spilling over into other activity, including wholly UK-based parts of the trade.

The amendment would require separate identification of the foreign tax paid by an individual in respect of contracts, arrangements, assets and so on, entered into or acquired before 12 March—Budget day—this year. That foreign tax would be given as a credit against income tax no matter how much or how little UK tax arose out of the contract or asset. That would mean that foreign tax would reduce UK tax on other earnings unrelated to the foreign tax payment, including wholly UK-based activity.

The amendment adds complexity and is unjustified. I appreciate that it was moved in a probing and questioning way. Nobody should expect the Exchequer to subsidise rates of foreign tax that exceed its own, or to allow foreign tax to reduce income tax arising on UK earnings. That is a reasonable position, and I hope that the hon. Member for South-West Hertfordshire will accept it and withdraw the amendment. If he does not, we will have to resist.

David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)

With respect to the Financial Secretary, there is an element of retrospectivity here, in that transactions entered into under one arrangement will be treated differently now, under the provision. That is not the clearest or most obvious example of retrospectivity—we will come to one in a moment. None the less, I recognise her argument. She referred to the Legal and General case of 2006, which she said had been dealt with as far as corporation tax was concerned  in 2005. It appears that the Treasury was at least prescient in 2005. I imagine that those were various stages of the action.

Jane Kennedy (Financial Secretary, HM Treasury; Liverpool, Wavertree, Labour)

It was exactly that. Clearly, Her Majesty’s Revenue and Customs was aware of that, and the dispute arose some time before. The law was fixed, and would have always been so, because it was never intended to work as was implied.

David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)

I am grateful for that. It raises a concern that we will come back to in a moment.

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede & Weybridge, Conservative)

Will my hon. Friend reflect on what the Financial Secretary has just said? As I understand it, she said that a court case was in progress with Legal and General, a pretty powerful organisation. HMRC obviously realised that the law was defective because in 2005 the Government amended the law to close the defect. If I understand her correctly, the Government allowed the case to be pursued through the courts at public expense, only to be defeated in a way in which they knew they would be defeated. If they did not know that, they would not have changed the law in 2005. Does my hon. Friend agree that that is a perverse course of action for the Government to have followed?

David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)

I think two points have been raised. First, my hon. Friend has raised the point about the interrelationship between specific cases in case law and statutes. We will return to that point in a moment. The Committee may want to reflect on the Padmore case of 1987, which provoked a change in the law. At least that change in statute was without prejudice to judicial decisions being made in the matter before the change in law was announced. It seems a rather strange position to change the statute in the middle of a case. It goes against certain aspects of the rule of law.

Another point worth noting, which we will also come back to, is that it appears that this matter was on the radar of HMRC and the Treasury in 2005. Given the way in which these cases tend to work over several years, it was probably on their radar in 2004, if not earlier. If that is the case, why are we bringing in this legislation that has an element of retrospectivity in 2008?

Mark Field (Cities of London & Westminster, Conservative)

Does this exchange of views not sum up the concerns that my hon. Friend has put forward about retrospection? If a statute is changed halfway through a case, one can understand it if it is aimed to overcome loopholes in future. In such an instance, it is all the more important that there is no sense of retroactive intent for the very reasons that my hon. Friend has set out.

David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)

There are concerns about retrospective legislation. I do not take an absolutist line on the issue, but to minimise those concerns it is at least reasonable to expect the Treasury to produce legislation at the earliest opportunity. It is not reasonable to fail to address an issue and to leave some ambiguity within the law for three or four years, knowing that one can come back to it at a later date.

This measure is not the worst example because, to be fair, it talks about income received after 6 April 2008. My concern is that some transactions will have been entered into before that time. A transaction could have been entered into between the conclusion of the Legal and General case and 6 April on an understanding that that case had set the law. The interested parties would then find that the Government have come back and said that the law will be different and any income received as a consequence of the transaction will be treated differently.

This is a mere forerunner of our debate on clause 55. The amendment has successfully flushed out the issues. However, the Financial Secretary acknowledged that I recognised in my opening remarks that the amendment would create complexity and two parallel systems that would be far from ideal. Therefore, having put on record our concerns about how the Government have addressed the issue, I beg to ask leave to withdraw the amendment.